Could coronavirus give SA (another) breather from Moody's junk status?


The unprecedented lockdown of the country due to the spread of the coronavirus may offer the country a reprieve from a much-anticipated ratings assessment by ratings agency Moody's, in what could see the country again dodging a downgrade to junk status.

Moody's has been expected to release its report on South Africa on Friday, just as the country goes under 21-day lockdown enforced by the government to curb the outbreak of the virus.

The shutdown, which will see key economic sectors grind to a halt, will likely have a devastating impact on growth and affected the country's fragile job market.

Economists, however, are hopeful that given the current global and domestic conditions, Moody's, which has already slashed the country's growth prospects, may delay its announcement.

"Our baseline is that they do nothing and instead release a research report on the following Monday. This would allow them time to see the impact of the coronavirus onshore and also the policy response," read a note released by Intellidex. 

Earlier this month, Moody's lowered South Africa's growth forecast for 2020 from 0.7% to 0.4%, as it cut forecasts for other G-20 countries for the first half of 2020, citing the impact of the coronavirus on economic activity.

According to Intellidex, should the agency not take a ratings decision, it could release a report affirming the negative outlook and then make a pronouncement later in the year.

It further noted that a "negative watch is also possible" if the agency wanted to send a signal that the weak fundamentals are exacerbated by the coronavirus.

"An outright downgrade now, whilst on the 'right' course on the fundamentals, would be premature for Moody’s."

'Stay of execution'

Moody's is the only agency that still ranks South Africa at Baa3, with a negative outlook. S&P Global Ratings and Fitch Ratings cut the nation to junk in 2017. 

Losing the investment-grade rating means South Africa will fall out of key debt gauges including the FTSE World Government Bond Index.

It was hoped that the National Budget in February, which introduced a plan to cut the public sector wage bill by R160.2 billion over three years, could temporarily stave off a further downgrade into junk.

However, the turmoil triggered by the impact of the coronavirus, which has wreaked havoc on the local market and global markets alike, has turned the economy on its head, sending the rand tumbling. 

Isaac Matshego, economist at Nedbank, is also leaning towards a possible reprieve, in the face of the current global turmoil induced by Covid-19.

He said he would be "very surprised if they come up with downgrade announcement" - likening the possible delay to a "stay of execution".

While there is the possibility of a delay, another scenario is that if a downgrade does occur, the decision won't have a major impact, as the market has already factored in the downgrade.

"f we do get downgraded tomorrow, then the additional pain to the market is going to be limited, versus if we got downgraded two years ago, or even without the virus," said Maarten Ackerman, Chief Economist Citadel Investment Services.

Skipping a scheduled announcement would not be something new for Moody's. In March 2019, the rating agency did not publish its review. No reason was given for the delay.

Ratings agencies such as Moody's have repeatedly raised the burden placed by the country's state-owned entities on the public purse, such as Eskom and SAA.

The national carrier has been placed under voluntary business rescue and is currently not flying. Local and international flights were cancelled, in the wake of the coronavirus pandemic.   

Whichever way the Moody's decision will swing, its weight is likely to be overshadowed by the panic and uncertainty that has gripped the country since the announcement of the lockdown on Tuesday evening by President Cyril Ramaphosa, amid a rapid rise in coronavirus infections.

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